2024 was the single hottest year on record and the last decade has seen a spate of extreme weather events connected to climate change. Droughts, flooding, wildfires and rising sea levels are some of the realities impacting corporations today. 

Naturally, governments and businesses are keen to adapt to a changing environment (even while working systematically to reduce carbon emissions and limit global warming). Climate risk disclosure is one strategy towards achieving a more secure and resilient global economy.

What is Climate Risk Disclosure?

The concepts of risk management, transparency and disclosure are well established in the business and financial sectors. Climate risk disclosure simply extends those practices to cover the risks to corporations presented by a warmer planet and increasingly volatile weather systems. Climate risk disclosure obligations require companies to conduct rigorous and systematic climate risk assessments and publicly report their findings. 

When corporations publish the predicted – or theoretical – financial risks and opportunities created by climate change, they are providing essential transparency to investors, regulators, and stakeholders about potential climate-related impacts. They are also demonstrating the company’s level of awareness and preparedness in the event of an extreme weather event, or new regulatory or market realities. 

Climate Risk Analysis

Risks stemming from climate change fall into two broad categories: physical risks and transitional risks. Physical risks are direct dangers to property, assets and people posed by events like floods, wildfires, and high winds etc. They can also disrupt operations and supply chains or consumer bases. 

Transitional risks can include policy and regulatory changes, carbon taxes and officially mandated decarbonization, volatile energy costs, rising insurance premiums, shifting consumer behavior, and any other costs, tariffs or expenses generated by climate change.

Key Disclosure Frameworks

TCFD – Task Force on Climate-related Financial Disclosures

The Task Force on Climate-related Financial Disclosures (TCFD) was developed by the Financial Stability Board (FSB) to create voluntary guidelines for companies wishing to implement effective climate risk management. The TCFD framework was widely adopted, with companies quick to realize the benefits of TCFD reporting.

The TCFD framework focuses on four fundamental areas:

• Governance
• Strategy
• Risk Management
• Metrics & Targets

The TCFD reporting process gives companies a clear structure in which to analyse and disclose how climate risks may impact their financial outlook and to develop long-term strategies and contingencies to mitigate risks.

ICL Group is one of many global corporations that use the Task Force on Climate-related Financial Disclosures TCFD framework to guide climate strategy and align sustainability with financial performance. The TCFD framework is widely adopted across sectors, including finance, energy, manufacturing, and retail, and has since been absorbed into the standards of the International Sustainability Standards Board (ISSB).

ISSB – International Sustainability Standards Board

The International Sustainability Standards Board (ISSB) was established by the IFRS Foundation (a global organization which also oversees international accounting standards) to consolidate proliferating ESG reporting protocols and frameworks into a single international standard, more appropriate for a globalized economy.

The IFRS S2 standard is specifically for climate-related disclosures. It is built on TCFD climate risk disclosure rules but is more structured and investor-focused. The standardized climate risk disclosure obligations of the ISSB promote consistency and transparency and facilitate ESG reporting for multinationals that operate across multiple jurisdictions.

EU CSRD – Corporate Sustainability Reporting Directive

The Corporate Sustainability Reporting Directive (CSRD) is an EU directive that imposes mandatory climate risk disclosure on companies that fall under its jurisdiction.The CSRD replaces the old Non-Financial Reporting Directive (NFRD). Thousands of EU based companies, and many corporations operating in the EU are subject to CSRD compliance. 

CSRD compliance and reporting requires alignment with the European Sustainability Reporting Standards (ESRS), which are consistent with TCFD and ISSB standards.

CSRD reporting required companies to detail how the effects of climate change can impact their business, and how their operations impact the climate (double materiality). Non-compliance with CSRD reporting can result in legal and reputational risks.

Climate Risk Disclosure and Corporate Policies

The requirement to meet CSRD and other reporting obligations is reshaping and redefining corporate policies. Climate risk management is firmly on the corporate agenda and focuses the attention of senior managers and board members. 

Risk Management Integration

Companies that comply with external disclosure frameworks usually expand their existing enterprise risk management systems to include detailed climate risk assessments. The process of analysing, quantifying, and managing climate risks becomes a strategic risk lens that can provide a corporation with genuine long-term protection against tangible threats.

Board-Level Responsibility

SEC climate risk disclosure obligations, and a commitment to frameworks like the TCFD, requires companies to detail the level of board oversight of climate risks. Governance and accountability extend to the very highest levels in the corporate hierarchy and directly influence company policy and strategic direction.

Operational Strategy and Investments

Climate risk disclosure necessitates a proactive and multifaceted approach to risk management. Companies are required to demonstrate their strategies for adapting to climate risks, efforts to mitigate existing deficiencies, and contingencies for dealing with future negative impacts. Strategies can include:

• A fundamental transition to renewable energy
• The development of optimized and resilient supply chains
• Systematic decarbonizing of existing operations

ESG and Finance Alignment

Climate risk disclosure frameworks serve a useful purpose as a communications bridge for proponents of ESG goals and teams with responsibility for corporate finances. Frameworks like ISSB and CSRD provide a high level of clarity and standardization, allowing clear and unambiguous communication between sustainability leaders, CFOs, and investor relations teams.

Transparency and Stakeholder Trust

Active and transparent compliance with disclosure frameworks – either on a voluntary or mandatory basis – demonstrates corporate responsibility and integrity. It also builds trust in a company’s ability to anticipate and plan for future contingencies through strategic climate risk management, therefore demonstrating resilience and reliability. 

Companies can build trust across the spectrum of stakeholders:

• Investors 

Investors wish to see transparency, stability, resilience and compliance with regulations. Ethical investors will be attracted to a high ESG rating.

• Customers

Customers who prefer ethical products may opt for disclosure compliant companies. Disclosure is a potentially powerful marketing tool.

• Regulators 

Regulators demand to see transparency and no company wants the adverse publicity and other negative consequences of antagonising regulators.

• Employees 

Companies that wish to hire highly motivated employees with a strong ethical foundation may be able to use disclosure credentials as a recruiting tool.  

Conclusion

When climate risk disclosure and adherence to regulatory frameworks is properly understood and implemented, it becomes a potent tool for building corporate resilience. SEC, CSRD  or TCFD climate risk disclosure is also a  useful public relations and marketing tool that boosts a company’s ESG credentials and demonstrates that the company is robust enough to navigate future climate related difficulties.

When a company embraces climate transparency – from the boardroom downwards – core operations and decision making processes occur within a strategic climate-resilient framework. The company can meet stakeholder expectations and is in a stronger position for future growth and new market penetration. 

Summary: The Benefits of Climate Risk Disclosure

• Companies can future-proof their operations and adapt to a business environment that is transitioning to carbon net-zero.
• Compliance with carbon risk disclosure has positive reputational consequences and increases investor trust (as demonstrated by companies like ICL that have tied ESG progress to credit instruments).
• A clear and standardized framework improves communication and alignment between ESG proponents and financial planners and enterprise risk managers.
• Multinational corporations and exporters can enhance their competitive positioning as global markets shift towards sustainability

Companies that embrace the concept of climate risk disclosure, and integrate both the wider principles and specific requirements into their strategic vision and operations, are investing in a significant long term advantage.